Publishing Proof of Reserves is Irrelevant and Where the Crypto Industry May Fork

Many crypto exchanges have recently announced their readiness to publish Proofs of Reserves data to reassure customers about the safety of their funds.?Frankly, I believe this measure is a minor enhancement that is mostly irrelevant.

Here is why Proof of Reserves does not guarantee clients' funds safety:

• Unfortunately, in many countries, even in Europe (which has the most sophisticated crypto regulations)?it is not explicitly required?by law to segregate customers' crypto funds into separate wallets, or not to commingle these funds with?the company's own funds, and to have a proper reconciliation process as a part of your standard operating procedures.
• It is also not required in most countries for a regulated VASP to have a certain amount of own funds to be able to absorb possible losses, hacks, or other financial risks so that the customer funds can be protected and compensated if something goes wrong.
• I don't know any country in the world that has any formal requirements around how the company should account for the value of its own?tokens?or?how the company can trade its own token or whether or not it is allowed to count your own tokens towards the total amount of your own funds and at which price.

Don't get me wrong – I strongly believe that issuing your own tokens can be very beneficial and provide massive value.?I also believe that most FinTech founders are honest and what to do good. There is nothing wrong with having your own tokens.

However, I have just illustrated to you that there are many accounting and valuation loopholes that can be abused to disguise the real financial position of a crypto project, especially if a project has its own token, which is why the Proof of Reserves initiatives don't really solve the problem of trust of funds safety. As long as funds safeguarding is an optional best practice, and there are no minimum requirements for the VASP's own funds,?someone who is under liquidity pressure or?someone opportunistic who is tempted to make a quick trade and hopes to return the funds back, will try.?

As I mentioned earlier, I expect a wave of additional regulations coming up fairly quickly to tackle the issue of crypto funds segregation and own funds requirements for VASPs. I also expect that the VASP approval processes will slow down and become more cumbersome and take much longer as a result. I also expect additional?regulatory attacks against DeFi?protocols (Tornado cash sanctions were just a test drive).

Another interesting coincidence is the correlation between CBDC initiatives and the anti-crypto position of the government. Just look at China, Nigeria, and now the NY Fed initiative. China, Nigeria, and the US are known to be among the most anti-crypto governments,?mainly because of their attempts to protect domestic capital and currency controls.??

The main reasons why I believe that CBDCs, at least in their current iteration,?are "dead on arrival" are:

• they don't offer any tangible benefits?in comparison to existing digital methods of payments, there is no compelling use case for anyone to use CBDC;
• it's domestic only and the majority of payments frictions are seen in international payments;
• CBDCs are often introduced as a "government alternative" to "independent" cryptocurrencies and governments all over the world have major?credibility issues;
• concerns around privacy are not addressed.

It is also quite likely that more?scandals and revelations and fallouts with crypto projects are underway.

What does it mean?in terms of demand and opportunities for?VASP services? The areas that are visibly continuing to grow and expand are cross-border crypto payments, especially with or between emerging markets, Web3 and gaming, non-US issued and non-USD backed stablecoins, and tokenization of assets.

As a result, VASP authorizations in reputable jurisdictions will become more valuable. If you do have a project in mind and you are contemplating applying for your own VASP license versus using a white-label partnership, you can organize your thinking?by watching this recorded training on the advantages and disadvantages of using the white-label partner and, as always, if you need help – you know how to find me!

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